Monday, June 29, 2009

The Renminbi exchange rate has entered a de facto new regime - featuring a quasi-hard peg to the USD - since July 2008, and we think this will remain unchanged through 2009 and most probably over the next 12 months. There are two likely exit strategies: 1) resumption of gradual appreciation against USD under a de facto crawling peg regime, and 2) a genuine and transparent peg to a currency basket. The latter is more likely to be adopted than the former, in our view.Hong Kong: Q&A on Monetary ConditionsThe stream of capital inflows into the Hong Kong dollar and the associated interbank liquidity has refueled discussions about the Hong Kong currency board and monetary system. In this report, we compile the commonly asked questions, and our answers to them, related to Hong Kong's currency board and monetary system, the latest developments with respect to liquidity conditions, and longer term fundamental considerations for monetary management in Hong Kong.India: Rising Significant of Rural DemandWhile we expect some of the cyclical factors to soften over the next 12 months, we are optimistic that the government will begin to address a few of the long- pending structural issues necessary to provide a sustainable improvement in farm incomes. Moreover, we believe that the non-farm rural income will maintain its healthy growth, implying that the rural economy will continue to be an important market destination for corporate India. Indonesia: Adding Another "I" to the B-R-I-C Story?Indonesia will still undergo cyclical pain in 2009. However, we expect the positive trigger in the form of strengthened political mandate in the recent general elections to help accelerate policy reforms, which together with the ongoing structural decline in cost of capital, is likely to help unleash Indonesia's growth potential of 6-7% by 2011 onwards.

US Outlook – GS Inc With quarter (and half-year) end approaching, many are wondering whether market participants will use one of the summer's biggest liquidity events to add or reduce equity exposure. Clearly, simple asset allocation models will predict large equity notionals for sale (given 20% outperformance of equities over treasuries QTD), yet there are a number of other factors which could provide a worthy counterbalance to this potential selling -- and limit it's impact:1. US Mutual Funds are beating the S&P 500 by the most in 26 years. According to Morningstar, Active U.S. Equity Funds were up 7% through the end of May (vs the S&P 500 +3%) - the biggest gap since 1983. A lower correlation and realized vol environment (more on this in point 3 below) has led to a far more attractive fundamental stock picking landscape. Anecdotal feedback from PM's is that they continue to see the environment as favorable, and will continue to deploy cash balances, even with a strong start to the year (and especially with the index in positive territory). TrimTabs also reports that hedge funds had record performance in May (+5.6% monthly return is the highest since the dataset began in 2000).2. US Pensions are still broadly underweight equities. In a June 4 report, Michael Moran estimated that 80% of pensions were underweight equities as of the end of '08). In late May, TrimTabs estimated that if both Private and Public pension plans decided to fully rebalance, this would constitute approx US$450BN of equity buying. Even half this number would represent approx 2% of the mkt cap of all U.S. stocks. While it is clear to us through conversations, and our futures and PT flows, that pensions have done a lot of work correcting this underweight, there appears to be a lot more wood to chop. It is important to note that while asset allocation models may predict quarter end outflows - this assumes that pensions have been consistently rebalancing up until this point in time. Conversations with a broad array of pensions tell us that this has not been the case - hence our conviction that pensions are still underweight equities.3. Equity markets are seeing a period of relative stability (a signpost institutions have looked for). In the last 3 weeks, the S&P 500 moved less than 1% on the day, 75% of the time (11 out of the last 15 days). This speaks to the magnitude of how much markets have calmed, and it is no surprise that realized volatility continues to bleed lower (Vix is now at pre-Lehman levels). While many people are talking about the pullback we have had - we have really been treading water for the last 2 months (on moderate volume) - holding an 880 - 950 range since the start of May. Remember that while we are -5% off the Jun 12 highs, we are still 36% off the March 9 lows!4. Flow of funds continues to be very supportive for equities. AMG has reported 13 out of 15 weeks of net inflows (totaling approx US$11billion note: this week saw a small outflow) and Money Market Funds continue to see record outflows. Our flows clearly support this theme of money going into equities - since April 1st we have been net-to-buy through our program trading franchise approx 75% of the time (43 out of 58 days) - alongside a +15% rally in the S&P 500. The important thing to remember is that the amount of inflows still pales in comparison to the $100billion to US$180 billion of outflows in 2008. Key takeaway: while the trend is constructive, and there is money being put to work, there is clearly a lot more dry powder on the sidelines.5. The trend is your friend. The mkt has moved in the same direction the day following quarter-end, 5 out of the last 6 times. The mkt has moved in the same direction the day following half-year end, 4 out of the last 5 times. The mkt has moved in the same direction the day following month end, 5 out of the last 6 times. One other trend worth noting - the market has traded higher on 5 of the last 6 quarter ends.This is the most popular chart of Q2, money market assets/US equity market cap. having hit a 30 year high of 60%, it has come back to 42%, but still well above the long term average of 20%

Thursday, June 25, 2009

The only interesting point about this week’s FOMC meeting is that Billyboy seems to be less worried about “deflation”. This is another contrarian reason to be constructive about government bonds. There is zero definitive evidence that housing is about to “bottom” in the US. While the American commercial real estate market continues to deteriorate.· A stronger oil price continues to be a sign of rising risk tolerance and a falling oil price of rising risk aversion, with the US dollar trading inversely to that. As was the case this time last year, GREED & fear believes the oil price is now being pushed by financial players. While GREED & fear is as bullish as anyone on the structural story for emerging markets, the view here remains that the commodity complex is now vulnerable if there is renewed disappointment about Western growth prospects in coming months.· “Global warming” maintains its status as the developed world’s new religion. This is why “climate change” seems almost as high on the list of the priorities of the Obama administration as “healthcare reform”.· The arbitrary nature of “green” investment mandates is obviously irrational from an investment perspective. From a longer term perspective it is almost inevitable that the frenzy for green will attract to the area the usual mob of con men and spivs who jump on every bandwagon. There is also a more fundamental risk that government sponsorship of alternative energy leads to massive over investment in the area.· Regardless of the fundamental merits or otherwise of the climate change story, alternative energy stocks will, for now, continue to trade as high beta proxies for the oil price. They, therefore, have no diversification merit.· There is a very strong economic case for growing links between Malaysia and Singapore. Singapore needs land and space to grow into, in the sense that southern Johor could become the equivalent of what the Shenzhen special economic zone became for Hong Kong. Malaysia could also profit from Singapore’s skill sets and capital. Any such development would be a major positive for both stock markets.· Lee Kuan Yew’s eight day visit to Malaysia is interesting since, in GREED & fear’s view, nothing significant is going to happen in terms of new bilateral agreements between Malaysia and Singapore unless it is approved by the “minister mentor”.· Najib’s first three months in power since he took over from Badawi have at least seen some dilution of the New Economic Policy (NEP). Any dilution of the NEP should be viewed as a positive, even if investors should also remain fundamentally sceptical about whether UMNO is capable of wholesale reform of this outmoded policy.· The Malaysia stock market has been relatively unexciting in the Asian equity context reflecting its by now well established low beta status. This means it underperforms the regional index in a rally and outperforms in a correction.· The presidential election season is approaching in Indonesia with all the evidence suggesting a landslide victory for incumbent president Yudhoyono. The reasons why Yudhoyono looks an overwhelming favourite to win are his appealing acronym, his “clean” image and the relatively stable economy.· The Indonesia economy has so far shown impressive resilience this year, because of its domestic demand orientation as well as its commodity gearing. This resilience also reflects the economy’s lack of corporate or consumer debt.· Assuming a “SBY” victory, looking forward a critical issue from a macro economic perspective is domestic infrastructure where there has been a disappointing lack of progress in Yudhoyono’s first term despite an almost ridiculous amount of talk.· Indonesia still offers a fundamentally exciting long term consumption story with a positive demographic. Another positive point is that Indonesia is now the marginal supplier of coal and palm oil to the resource deficient economies of China and India.· Having fended off for now calls for the passage of a modern version of the Glass-Steagall Act, the vested interests behind securitisation are emerging from their caves to argue their case. But in GREED & fear’s view securitisation only makes sense in a “market” system where financial entities face the risk of going bust. America clearly does not have such a system.· Agricultural machinery maker Kubota will be added to the Japanese thematic portfolio this week with an initial weighting of 3%. The investment will be paid for by removing Inpex. As for the Asia Pacific ex-Japan relative-return portfolio, the overweight in China will be increased by 1ppt will the money taken from Hong Kong.